"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision, author of Things That Make You Go Hmmm...one of the world's most popular & widely-read financial publications.

Tuesday, 16 August 2016

Sydney's record construction pipeline: where, when, & what?

Record pipeline

After years of under-building from about 2005 forth in Sydney, between July 2012 and April 2016 a vastly improved 163,500 dwelling approvals have been recorded for the Greater Sydney region (inclusive of the Central Coast and the Blue Mountains) and the Illawarra.

There has been report after report concerned with the record number of units and apartments under construction.

Yet to date vacancy rates have barely budged at the city level, and apartment rents have kept rising.

Bottleneck

The reason for this - and indeed the reason that so many dwellings are under construction - as I've looked at previously here, is that multi-unit dwellings generally take considerably longer to proceed from approval, to commencement, and then to completion (perhaps up to several years from start to finish) than detached houses on greenfield sites, at typically just a matter of months.

As a result, over the year to April 2016, after accounting for demolitions there were just 11,937 net detached dwelling completions, and 18,370 multi-unit dwellings.

Not only has this rate of net completions after accounting for demolitions not been making up for the years of under-building, it has barely even been keeping pace with current annual Greater Sydney population growth of an estimated 83,500 per annum.

This is particularly so given that so many small apartments are being built, typically housing only two persons (not to mention those apartments left vacant by offshore investors), contributing to a mismatch of supply increasingly characterised by a surfeit of high rise apartment stock.

It's worth noting that this completions data doesn't easily capture the addition of granny flats, but the point still stands - completions in Sydney just haven't been that high...to date.

From July 2012 to April 2016, after accounting for demolitions, there were net dwelling completions of only 101,300, just 62 per cent of the number of dwelling approvals over the same time period.

The population of Greater Sydney increased by somewhere in the region of 307,000 heads over that time, so it's a little wonder that population growth has been absorbing new supply.

This dynamic is finally about to change, though, as the record pipeline of new apartments under construction begins to come online, although the industry being stretched to full capacity will inevitably see construction costs rising henceforth.

Local Government Authorities (LGAs)

At the LGA level we can see that up to April 2016 there have been few regions that have really been hammering out unduly high net dwelling completions.

However, looking at the LGA dwelling approvals figures split out by financial year helps to identify the areas at risk of emerging oversupply (as well as certain upmarket localities such as Manly, Mosman, and Woollahra, where the total stock of dwellings has remained all but fixed).

The City of Sydney LGA covers a large central area of 25 square kilometres and comprises a great many hugely popular suburbs, and in that context its 13,700 approvals from July 2012 represent relatively slim pickings.

However, the volume of dwelling approvals - especially for apartments - in certain other areas is abnormally high in historical terms, in turn suggesting an elevated level of risk: Blacktown, Parramatta, the Hills District, Liverpool, and to some extent Camden and Ryde.

The Canada Bay approvals figures don't really capture the volume of building that has already taken place at Wentworth Point and some surrounding suburbs.

Case study: Parra

I don't quite have the space here (read: can't be bothered) to discuss apartment supply in detail across every Sydney LGA, but a quick look at the Parramatta data is instructive.

Parramatta has seen several years of abnormally high apartment approvals figures, yet until relatively recently net dwelling completions had not lifted too dramatically.

This rapidly changed in September 2015 as a slew of new projects began to come onstream, and there is plenty more to come in the pipeline, with yet another 3,339 multi-unit dwellings approved over the 12 months to April 2016. Wow-wee!

I took a drive around Parramatta a fortnight or so ago, and the amount of building still underway is really quite eye-popping.

This may result in valuation challenges at settlement for off-the-plan apartment purchases, rising vacancy rates, declining rents, and widespread instances of weak capital growth over the coming years (by which, of course, I mean negative).

Caveat emptor!

Regular readers may recall I spent a joy-filled afternoon driving around looking at a number of apartment construction hotspots recently, and I wrote a bit about it here, with a few photo or two thrown in for good measure.